CASE COMMENT

ICOMM TELE LTD. Vs. PUNJAB WATER SUPPLY BOARD

[2019 SCC 391]

Submitted by-

Drishti Tiwari

R450217036

500060562

B.A.LL.B.(EL) B1; Sem VII

Introduction

In a decision of 11 March 2019, the Supreme Court of India (the “Court“) struck down part
of an arbitration clause which required a claimant to deposit 10 per cent of the amount
claimed with the arbitrator before the arbitration went ahead. The contract was between a
government entity and a private party and the Court relied on principles of Indian
constitutional and administrative law to hold that the clause was arbitrary and therefore liable
to be struck down. The Court also emphasised the need for arbitration to be speedy, effective
and inexpensive so that it can “de-clog” the overburdened court system in India. This is an
important decision for parties with arbitration agreements with Indian state or state-owned
entities, and another encouraging indicator of the pro-arbitration mindset shown by the
highest echelons of the Indian judiciary.

Background

In 2008, Punjab State Water Supply & Sewerage Board (the “Board“) awarded a tender to
M/S ICOMM Tele Ltd. (“ICOMM“) relating to work on a sewage treatment plant. The
contract between the parties incorporated the Board’s tender notice. The notice contained an
arbitration provision and clause 25(vii) provided that the party initiating arbitration would
have to furnish a deposit for ten per cent of the amount claimed in a bank. If the award was
granted in favour of the claimant, the deposit would be refunded to them in proportion to the
amount awarded with respect to the amount claimed and the balance, if any, would be paid to
the other party.

After a dispute arose between the parties and arbitration was initiated, ICOMM wrote to the
Board requesting a waiver of the 10 per cent deposit fee. ICOMM received no response from
the Board and subsequently filed a writ petition in the Punjab and Haryana High Court,
challenging the validity of clause 25(vii). After the High Court dismissed the writ petition,
ICOMM appealed to the Supreme Court.

Issues

 Scope of Arbitration clause 25 (viii)

 The initial deposit fee for the Arbitration process

ICOMM’s “unfair bargaining power” argument

ICOMM argued that the arbitration clause was void as it was a ‘contract of adhesion’ owing
to the unfair bargaining power between ICOMM and the Board. ICOMM relied on Central
Inland Water Transport Corporation v Brojo Nath Ganguly (1986) 3 SCC 156, a case
concerning the disciplinary rules in an employment contract between a state-owned entity and
its employees. The court found that the employees had no choice but to accept the rules
owing to the inequality in bargaining power, and that the rules were discriminatory and
arbitrary. However, the court also noted that its reasoning would not apply to a commercial
transaction. On this basis, the Court rejected ICOMM’s arguments.

Arbitrariness and Article 14 of the Indian Constitution

ICOMM also argued that the clause was arbitrary and therefore violated Article 14 of the
Indian Constitution. At the outset the Court noted that “even within the contractual sphere,
the requirement of Article 14  [of the Constitution of India] to act fairly, justly and
reasonably by persons who are “state” authorities or instrumentalities continues“. The court
agreed with ICOMM’s submissions that the clause was arbitrary for these reasons:
  The purpose of the 10 per cent deposit, as mentioned in clause 25(vii), was to avoid
frivolous claims. However, it is a well-settled principle of Indian law that a frivolous
claim could be dismissed with exemplary costs. The Court held that the requirement
to deposit 10 per cent of the claim had no nexus with discouraging frivolous claims as
the deposit was to be made for all claims, frivolous or otherwise.
 The court also emphasized the fact that even if a claimant were successful, it still may
not be able to claim a refund of the entire deposit. This made the clause not only
excessive and disproportionate, but also arbitrary.

Reducing the burden on the Indian court system

The Court also emphasised the need to encourage arbitration as an alternative means of
dispute resolution due to the time and costs associated with litigation. It said that often a
deposit of 10 per cent of a large claim would be more than the court fees which parties would
have filed. The Court held that such pre-deposit clauses discourage arbitration and lead to
“clogging” of the court system.

The judgment of the Case

An important aspect covered from the case is found that litigation is not allowed for
frivolous, exemplary damage, or punitive damage. Therefore, a “deposit at call” of 10 percent
of the amount has to be claimed. A 10% deposit is necessary to be made before determination
that a claim made by the party invoking arbitration is frivolous. An important aspect to be
considered in mind in deciding such a clause will be arbitrary in the sense which is biased,
unjust, unfair which no reasonable man agrees to. A claim for the case is dismissed and may
not be frivolous. As it is clear from the fact that when three arbitrators are appointed to settle
the dispute there can be the majority and minority awards, making it obvious that there can be
two or more possible or even plausible views which could lead to dismissal or allowed based
on the merits and not because it is frivolous. Also, even when a claim is said to be correct and
justified, the amount need not be refunded to the claimant. This would make the entire clause
wholly arbitrary being not only unfair and misappropriate but also a biased and unjust
decision to the claimant party who lost the arbitration and entitled to forfeit a part of the
deposit that falls proportionately short in comparison to what is claimed and what is awarded.
Further, it was also observed that Arbitration is considered to be a settled law which an
important dispute resolution mechanism for settling conflicts between two parties. Arbitration
is encouraged due to the high pendency of cases in courts and also the high cost of Litigation.
It can also be analyzed that a deposit of ten percent of the claim will be greater than the court
fees for filing the case.

Comment

In recent times, a number of Indian appellate court judgments have focused on arbitration
clauses in government contracts – for instance, we discussed a line of case law on the
appointment of former or current employees as arbitrators, a common feature in government
contracts. Private parties may have limited ability to negotiate terms in such contracts
particularly (as in the ICOMM  case) where these terms are contained in the invitation to
tender and subsequently incorporated into the contract. This case shows that private parties
may potentially be able to challenge onerous provisions in arbitration clauses under Indian
constitutional law, although the threshold will be a high one. It is important to note that such
constitutional challenges may not be available where there are no state parties involved and
where commercial parties have willingly circumscribed their ability to commence claims
under a negotiated arbitration agreement.

Even more significantly, from an international perspective, this judgment offers further
evidence of the support for, and promotion of, arbitration by the Indian judiciary, and the goal
to make India an increasingly arbitration-friendly jurisdiction.